ve income generating opportunities. There may be reasons other than income to pursue the opportunity associated with the lower return; however, there is an opportunity cost associated with such a decision. The opportunity cost in such a case is the difference between the gains associated with the two opportunities.
The concept of opportunity cost is somewhat less easily understood when "gain" is defined as cost minimization. If an asset or factor of production can be applied to the creation of two products that are characterized by differing amounts of the use of an asset or a factor of production required in creating each product, an opportunity cost exists that is the difference in the costs required to create the two products.
When the concept of comparative advantage is applied to international trade one state may have an absolute advantage over another state in relation to the costs of production of two separate products. Each of the two states, however, has opportunity costs in relation to their own production of the two products. The theory of comparative advantage holds that the two states can engage in mutually beneficial trade with one another in the two products although one state has an absolute cost advantage in relation to both products. The key that makes mutually beneficial trade possible is the relationship between the opportunity costs in each country in relation to creating the two products. A ratio-based analysis determines the production mix of the two products for each country that will provide the maximum benefit to each country. The assumption underlying the theory of comparative advantage is that no single state will have comparative advantage in all commodities. Therefore, mutually beneficial trade between two state always will be possible - once the feasible production mix has been determined.
The concept of a comparative advantage in international trade, although generally credited to Ricard...